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   Many advisors
need to retool
their portfolio models
With paltry bond yields here to stay, it’s time to revisit return assumptions
Fund managers have launched a number of “one-ticket” products to catch up with investor demand
Investor interest in asset-allocation products has picked up steam in recent years and fund companies are bringing more products to market as a result.
Asset-allocation funds, which fall under the umbrella of multi-asset products, are designed to deliver a diversified investment portfolio within a single vehicle. Multi-asset funds accounted for 3% of the Canadian ETF market as of September 2020 — a month in which eight asset-allocation ETFs launched, according to a report from National Bank of Canada.
“Now that the need has been identified for ‘one-ticket’ solutions, all the ETF providers are rushing to meet that need,” says Daniel Straus, director, ETFs and financial prod- ucts research, with National Bank.
Recent launches in the asset-allocation space include a retirement income ETF from Vanguard Investments Canada Inc., four sustainable ETFs from RBC iShares and four ETFs from Mackenzie Investments.
Vanguard’s new Retirement Income ETF Portfolio has a target payout of 4% per year with the possibility of capital appreciation. The fund invests in four Vanguard equity ETFs and four Vanguard fixed-income ETFs, and has a manage- ment fee of 0.29%.
While asset-allocation funds have been around
for some time, they began taking off in 2018, when Vanguard launched three portfolio products (conserv- ative, balanced and growth versions) that were far cheaper than similar funds on the market.
RBC iShares’ four new asset-allocation ETFs focus on environmental, social and governance (ESG) criteria, which continue to be popular among investors. “The demand and interest in [ESG] have been riding to a head recently,” says Straus, pointing to increasing flows into ESG ETFs.
The new iShares funds include the iShares ESG Conserva- tive Balanced ETF Portfolio, the iShares Balanced ETF Portfolio, the iShares ESG Growth ETF Portfolio and the iShares ESG Equity ETF Portfolio. The management fee for each is 0.22%.
Because there is no standardization for what constitutes ESG and how it’s measured, Straus says, trading in ESG ETFs requires due diligence to understand a fund’s under- lying methodology. For example, ESG funds may include oil companies. If an investor prefers to avoid the energy sector, they’ll need to research what they’re buying, Straus says.
“When you dig deeper, you can understand the reasoning behind [ESG decisions], and then it’s just a matter of deciding which methodology is the trend you’re going to hitch your wagon to,” Straus says.
Mackenzie brought four asset-allocation ETFs to market in September: the Mackenzie Global Fixed Income Allocation ETF, the Mackenzie Conservative Allocation ETF, the Macken- zie Balanced Allocation ETF and the Mackenzie Growth Allo- cation ETF. Management fees range from 0.17% to 0.25%.
Inflows into asset-allocation funds seem to be coming from do-it-yourself (DIY) investors and financial advisors, Straus says.
Prior to 2018, there was a sense in general that being a DIY investor meant building a customized portfolio yourself, Straus notes. But interest in asset-allocation products has proven that many DIY investors are happy to “set it and forget it.”
Advisors, Straus says, seem to be interested in asset- allocation funds as placeholders for cash in some accounts
or as a starting point for very small accounts that will eventually be built into a more customized portfolio over time. — FIONA COLLIE
  “When Vanguard
launched these three
products, I don’t think even
they were expecting them
to grow as much as they
did,” Straus says. The three funds had more than $3 billion in assets under management among them as of Sept. 30.
These products
have proven popular
with DIY investors
who want to “set it
and forget it”
low interest rates will be
here for years as central bankers cope with the aftermath of the massive economic collapse trig- gered by the Covid-19 pandemic. The dismal interest rate outlook has major ramifications for your clients’ portfolio construction.
The U.S. Congressional Budget Office recently forecast that the output gap — the difference between actual and potential GDP — will be elevated for most of this decade in the U.S. This is a complete reversal from the office’s January forecast, when actual GDP was expected to run above potential GDP into the mid-2020s.
The U.S. Federal Reserve Board recognizes that stub- bornly low inflation can collapse into deflation and has shifted to a policy of average inflation tar- geting. In other words, the Fed will allow inflation to run above 2% following periods in which inflation runs below that level. In practice, this means the Fed will be less inclined to raise rates until much later in the current economic recovery.
Members of the Fed also are considering yield-curve control to counter protracted economic weakness. Under such a policy, the Fed would target a longer- term rate and promise to buy enough bonds to keep that rate from rising.
(Japan introduced yield- curve control in 2006, targeting a 10-year government bond rate of about 0%. Recently, Australia’s central bank adopted a form of yield-curve control that targets a three-year yield of 0.25%.)
Yield-curve control would
put additional downward pres- sure on targeted longer-term rates. Add in the rate-suppressing impact of mammoth debt burdens and aging demographics, and the mantra of “lower for longer” becomes “a lot lower for a lot longer.”
Traditionally, financial advi- sors have used investment-grade bonds both as a source of income return and to reduce portfolio volatility and drawdowns. But low rates have eviscerated the income generated by these bonds. In 2010, 10-year Canadian government bonds averaged a yield to maturity of 3.2%. Today, that figure is about 0.6%, which translates as a stunning haircut of more than 80%.
Investment-grade bonds will continue to reduce port- folio volatility and drawdowns. However, this diversification comes with heightened inter- est rate risk. Extraordinarily low interest rates have extended the duration of Canadian invest- ment-grade bonds to more than 8.0. A mere 0.15% uptick in rates would be enough to cause price declines that would offset the income return for approximately an entire year.
Many advisors need to retool their portfolios in response to these economic conditions. The income role can be fulfilled by a
mix of asset sub-classes, includ- ing preferred shares, high-yield bonds, mortgages, high-dividend- paying stocks and REITs. Vola- tility can be reduced through judicious allocations to mar- ket-neutral funds, low-volatility equities and gold bullion. For example, Toronto-based Purpose Investments Inc.’s Gold Bullion Fund has a management expense ratio of 0.26%, thus offering a low- cost means of diversification. Publicly traded infrastructure can play the dual role of providing income and dampening volatility.
There is a growing array of products to meet clients’ expanding portfolio needs. For example, alternative mutual funds deploy a broader range of investment techniques, includ- ing short-selling. And ETFs offer- ing new strategies continue to be introduced, such as Fidelity Investments Canada ULC’s suite of low-volatility global ETFs.
Low interest rates will be here for years. Real returns are negative for bonds. As a result, you must build more robustly diversified portfolios for your clients. IE
Michael Nairne, CFP, CFA, is president of Tacita Capital Inc. of Toronto, a private family office and investment- counselling firm.
   There is a growing array of products to meet clients’ expanding needs

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